Shockwatch report: sub-Saharan Africa’s economic downturn and its impact on financial development
The current economic climate is causing a slowdown in financial development in sub-Saharan Africa. Credit is contracting, savings have declined, cross-border capital is less available and more costly, while indicators of financial soundness have deteriorated.
There have also been failures in governance of private and public institutions, including corruption and fraud that have deepened these problems. These have also undermined the public trust that is essential for long-term formal financial development.
While it seems unlikely that these condition will develop into a financial crisis unless there are further significant economic shocks, they are negative for economic growth – and especially given the on-going ‘credit crunch’ – in an economic environment that is already difficult. In this context, policy needs to counterbalance the short-term negative effects. However, it also needs to address the long-term needs to maintain and balance financial sector development and stability.
Sub-Saharan Africa is experiencing a deterioration in financial markets including a ‘credit crunch’ in the banking sector, reduced availability and increased expense of international finance – which has been made worse by the ‘Brexit’ shock – and increased financial fragility. On-going governance problems are making these issues worse.
Importantly for the region’s long-term growth prospects, scarce banking finance is being used in sectors with little or no transformational effect such as extractives or middle class consumer finance.
This is starving sectors that would transform the economy – such as manufacturing, trade and agri-processing – of the financing they need to grow, reducing the prospects for structural changes that would diversify the economy and create employment.
Policy suggestions include tailored macro prudential policy for sub-Saharan Africa, more robustly directing credit into priority sectors and international cooperation to tackle corruption.